High Court overrules tax court on input VAT claim on sponsorships
24 March 2015
Posted by: Author: Prof Peter Surtees
Author: Prof Peter Surtees (Norton Rose Fulbright South Africa)
If a taxpayer receives money, goods and services from sponsors in return for providing branding and marketing services to the sponsors, output VAT is payable on the value of these receipts. And if the sponsors decline to furnish tax invoices for the money, goods and services they receive from the taxpayer in return, may the taxpayer infer an input claim from available evidence? The tax court ruled that, when output VAT was due on the value of the receipts; the taxpayer could claim no input credits in the absence of tax invoices. On 6 February 2015 in ABC (Pty) Ltd v CSARS the High Court of the Western Cape overruled the tax court’s decision.
The tax court had based its decision on the absence of tax invoices from the sponsors. The Value-Added Tax Act, 1991(Act) requires a vendor who claims input tax credits to be in possession of supporting tax invoices from suppliers. Because the sponsors had declined to issue tax invoices, the taxpayer contended that SARS was obliged to force them to do so in fulfilment of their obligations as vendors and SARS’s responsibility "to carry out” the provisions of the Act.
The taxpayer staged annual international jazz festivals in Cape Town. In doing so it was carrying on an enterprise and had registered as a vendor in terms of the Act. It concluded sponsorship agreements with SAA, the City of Cape Town, the SABC and Telkom, who provided money, goods and services. In return, the taxpayer provided goods and services to the sponsors in the form of branding and marketing. All the sponsors were registered vendors under the Act.
It was common cause that the transactions were barter transactions. The values received by the taxpayer were evident from the sponsorship contracts. If, for example, SAA agreed to provide transport benefits, the value could be determined with reference to what these benefits would cost a person who bought and paid for them. Equally, the values of the goods and services provided in return by the taxpayer were determinable from the contracts. The tax court had found that the sponsors had not charged VAT and the taxpayer had not paid VAT to the sponsors, on the grounds that the sponsorship agreements provided that all amounts mentioned were exclusive of VAT. The High Court correctly rejected this approach. The parties were vendors, with all the attendant obligations, and the provisions of the Act were clear that, where the price of a transaction is agreed to be exclusive of VAT, this merely means that VAT has to be calculated and added to the price. It does not mean that the transaction falls outside the VAT net.
The High Court accepted the taxpayer’s submission that the agreements afforded sufficient records of the supplies to enable SARS to be satisfied that the input tax claims were genuine despite the refusal of the sponsors to issue tax invoices. A potentially far-reaching comment in the judgment was that "the fact that the sponsors have failed to issue the invoices does not make it impractical to require that they be issued. On the contrary it was the Commissioner’s responsibility in the circumstances to compel their issue. The evidence provides no basis for us to find that the Commissioner could reasonably have been satisfied as to the requirement of impracticability”. In other words, SARS was obliged to compel the sponsors to issue tax invoices.
Section 16(2) of the Act provides that, with certain exceptions, no input tax is allowed in the absence of a tax invoice. One of these exceptions is subparagraph (f), which read at the time: "the vendor…is in possession of documentary proof, as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deductions is furnished”. SARS raised three reasons why this provision was not applicable to the present matter. The court gave short shrift to each of them.
The court found for the taxpayer. This case confirms that, in appropriate circumstances wider than contended for by SARS, forms of evidence alternative to tax invoices are acceptable in support of input tax claims.
Case No A 129/2014
This article first appeared on nortonrosefulbright.com.